Payments Contingent On Release: Section 409A Correction Deadline - December 31, 2012

The December 31, 2012 deadline is approaching under the IRS's voluntary compliance program relating to corrections to Section 409A compensation arrangements where an employee can accelerate or delay compensation timing by his or her actions.¹ In our experience, this ability to accelerate or delay is most common when an employer conditions a payment (e.g., severance or a transaction bonus) on the employee's execution of a release of claims against the employer. The upcoming December 31, 2012 voluntary correction deadline applies only to situations where a payment is conditioned on an employee's actions.

Background on Section 409A

Section 409A of the Internal Revenue Code governs the timing and method of certain deferred compensation payments. Failing to comply with Section 409A for a compensation arrangement leads to harsh tax consequences for an employee (i.e., a 20% tax penalty and acceleration of income). Although penalties fall on the employee, most employers